Standing Committee A

[Mr. Joe Bentonin the Chair]
(Except clauses 13 to 15, 26, 61, 91 and 106, schedule 14, and new clauses relating to the effect of provisions of the Bill on section 18 of the Inheritance Tax Act 1984)

Clause 147

New basis for determining the market value of oil

Question proposed, That the clause stand part ofthe Bill.

John Healey: Good morning, Mr. Benton. I welcome you to the Chair on this now sunny morning as we come to part 5 of the Finance Bill. The clause provides for a new basis for determining the market value of oil for petroleum revenue tax purposes related to the non-arm’s length disposal of oil. The changes are being introduced because the opportunities that the current market value rules provide give considerable scope for tax arbitrage. The current rules that rely on a range of market values during a month are being replaced therefore under clauses 147 and 148 with prices based around what will be termed the notional delivery day for the majority of crude oils. They will be known as category 1 oils. For other blends of oil when prices are less readily available, Her Majesty’s Revenue and Customs will work with producers of those particular blends to arrive at an agreed and acceptable valuation method.
Under current rules, as the Committee may be aware, the market value of oil for non-arm’s length disposals—in other words, generally disposals within a wider group—is arrived at by taking an average of arm’s length prices during a month. That calculation method allows companies to track prices over a month and decide whether to dispose of oil at arm’s length or non-arm’s length depending on which was more tax-efficient and produced the lowest tax charge. The result was a significant tax loss to the public purse, and contractual and sales decisions based on tax considerations rather than commercial considerations.
The new rules stop such practices by valuing non-arm’s length sales of oil around the prices available two days before the delivery date, the delivery date itself and two days after, the so-called 2-1-2 method. That is commonly used in commercial contracts. New rules will be introduced to arrive at a delivery date for all circumstances when oil is disposed of at non-arm’s length. Under those rules, the delivery date will be the date of completion of load or the date of the bill of lading, whichever is appropriate.
The pricing method will apply to the major blends of oil for which there are commonly quoted daily prices. They will be known as category 1 oils. Other oils where such prices are less available or not appropriate will be known as category 2 oils, and HMRC and the producers of such oil will reach agreement on the most appropriate method for valuing such oils. On that basis, I commend the clause to the Committee.

Paul Goodman: Welcome to the oil section of the Finance Bill, Mr. Benton. I know that it will be an unbelievably exciting experience for you, as it will be for the rest of us. The heading “New basis for determining market value” is probably the most eye-catching of the headings of clauses 147 to 155 that cover the oil section, although that might not be saying very much. It must be said that some of the remaining clauses, especially clauses 153 and 155, are more significant.
I must confess that I have recently become used to Ministers moving clauses formally, so I was not necessarily expecting to hear the lucid explanation of the clause that the Financial Secretary has just given. However, since I have, I wish to ask him a couple of questions. The provisions are presented simply as an anti-avoidance clause. If it is such a clause, obviously we welcome its aim. It is important to eradicate attempts to take unfair advantage of the tax rules. I should like to hear an assurance from the hon. Gentleman that the clause is unconnected with the other tax changes that are proposed under the remaining clauses. Perhaps he would give us an idea of how much revenue it will raise.

Stewart Hosie: It is useful to consider what the Treasury Committee said about the pre-Budget report. It welcomed the Treasury’s promise of no further increases in North sea oil taxation in the length of this Parliament, not least because any further subsequent increases might increase uncertainty about future taxation of oil companies and might serve as a disincentive for future investment in the North sea.
In January, the Institute for Fiscal Studies’ green budget pointed to the problem of the type of tax regime introduced in 2002 and the supplementary charge being introduced. They said that
“the neutrality of this tax regime rests crucially on the constancy of the tax rate. If the tax rate that applies to future returns is expected to be higher than the tax rate at which upfront investment costs attract tax relief, then projects with a positive net present value in the absence of tax may become unattractive to investors”.
The key thing about both the Treasury Committee and the IFS is that one called for certainty and the other called for constancy. While there may be disagreements over tax rates and over new and unnecessarily complex regulation, I agree that clause 147 provides a solid and comprehensive framework for determining the market value of oil, and clause 148 provides for its introduction. I welcome the comprehensive nature of clause 147.

John Healey: The hon. Member for Dundee, East (Stewart Hosie) ended rather sooner than I had expected. I thought that he was going on to add a caveat to his welcome for the mechanism set out in clauses 147 and 148 for determining market value. He calls them solid and comprehensive as a framework and I welcome that. Particularly in relation to his amendments to clause 153, we will no doubt come on to debate the nature of stability and certainty in the tax regime and how that can best be delivered or, in some cases, undermined by some of the proposals.
Suffice it to say that I emphasise to him and to the hon. Member for Wycombe (Mr. Goodman) that the measures in clauses 147 and 148 and in the two sets of clauses that are coming up, before we get on to the question of supplementary charge rates, are revenue protection measures. On Second Reading, the hon. Member for Dundee, East said in a discussion with my right. hon. Friend the Paymaster General, which was subsequently confirmed and clarified to him in a letter on 4 May, that they are revenue protection measures and are not connected with the question of the level of taxation of North sea oil and gas.
I can inform the hon. Member for Wycombe that the measures in amendment No. 147 were announced at the pre-Budget report. They were published in a discussion document for the industry in July last year. The industry has been looking at them, helping us develop the detail and expecting them to be introduced. The hon. Gentleman asked what the revenue protected will be. Alongside the announcement in the pre-Budget report in December, we confirmed that the estimated revenue protected, using the new method of calculating market valuations, will be £40 million this year,£80 million next year, £80 million the following year and £80 million ongoing.
Therefore, it is a revenue protection measure. It is necessary. It is based on the experience that we have had, not of all companies but of some companies stealing a march on their competitors by the system of tax arbitrage to which the current laws leave us open. On that basis, I urge the Committee to support the Clause and Schedule 18.

Question put and agreed to.

Clause 147 ordered to stand part of the Bill.

Schedule 18

Oil taxation: market value of oil

John Healey: I beg to move amendment No. 225, in page 98 [Vol II], leave out lines 11 to 26 and insert—
‘“(A1) Where the conditions in subsection (A2) below are met in the case of a disposal of oil by a person, section 2(5A) of the Oil Taxation Act 1975 (“the 1975 Act”) (transportation etc) is to apply in determining the amount which the person is to bring into account for the purposes of the charge to corporation tax on income in respect of the disposal as it applies (or would apply) for the purposes of petroleum revenue tax.
(A2) The conditions are that—
(a) the oil is oil won from an oil field in the United Kingdom,
(b) the disposal is a disposal of the oil by the person crude in a sale at arm's length, as defined in paragraph 1 of Schedule 3 to the 1975 Act,
(c) the circumstances are such that the price received or receivable—
(i) falls to be taken into account under section 2(5)(a) of that Act in computing for the purposes of petroleum revenue tax the assessable profit or allowable loss accruing to the person in any chargeable period from the oil field, or
(ii) would fall to be so taken into account, had the oil field been a taxable field, as defined in section 185 of the Finance Act 1993,
(d) the terms of the contract are such as are described in the opening words of section 2(5A) of the 1975 Act,
(e) apart from subsection (A1) above, the person is not entitled to a transportation allowance in respect of the oil (see subsection (A3)) in computing his ring fence profits,
(f) the person does not claim a transportation allowance in respect of the oil in computing for the purposes of corporation tax any profits of his that are not ring fence profits.
(A3) In subsection (A2) above “transportation allowance”, in relation to any oil, means any of the following—
(a) a deduction in respect of the expense of transporting the oil as mentioned in the opening words of section 2(5A) of the 1975 Act,
(b) a deduction in respect of any costs of or incidental to the transportation of the oil as there mentioned,
(c) any such reduction in the price to be regarded as received or receivable for the oil as would result from the application of section 2(5A) of the 1975 Act, if that provision applied for the purposes of corporation tax.”.'
I feel that I ought to say a few words because the Committee is owed a brief explanation of why it is necessary to produce a Government amendment to our Bill at this point.
Schedule 18 provides the necessary amendments to the Oil Taxation Act 1975 and to other enactments to bring into effect the changes to the valuation of oil disposed of not at arm’s length. The changes are set out in clause 147. The commencement and transitional provisions are set out in clause 148.
The schedule ensures that oil taxation legislation deals with the consequential effects of introducing the new category 1 and category 2 definitions for oil valuation purposes—including the move from a monthly valuation basis for all oils to valuation based on date of delivery. It also defines the date of delivery for shipped oil that is not sold at arm’s length. The schedule gives powers to HMRC to make regulations regarding the different categories of oil, together with such other regulations as are required to enable companies to arrive at the market value of category 1 oil from commercially published information. The amendment will ensure that the schedule works as intended.

Amendment agreed to.

Schedule 18, as amended, agreed to.

Clause 148 ordered to stand part of the Bill.

Clause 149

Crude oil: power to make regulations

Stewart Hosie: I beg to move amendment No. 374, in page 124, line 10 [Vol I], at end insert
‘and
(f) may not be made until the Chancellor of the Exchequer has laid before both Houses of Parliament a report on the extent of tax avoidance in relation to blended oil.'.
Before the current oil price rises the sector was expected to deliver some £10.2 billion in yield to the Exchequer, based on a price level of $57.4 a barrel. My estimate is that the average price since 1 April has been about $69 a barrel, and based on that estimate the Government will gain an additional windfall, not related to the increase in supplementary charge, of between £2 billion and £2.5 billion this year. The£200 million that will be taken as a result of the changes to the blended oil regime in clause 149 may therefore seem like small beer, and they have been described primarily as anti-avoidance measures. The oil industry is peculiar, however; its capital, assets and expertise are highly flexible and, within reason, they go wherever the price and tax regime benefits them most, because there is a large number of moveable assets.
That is why I want to probe the clause by way of amendment No. 374. The explanatory notes suggest:
“The new rules will allocate a sale of blended equity and non-equity oil proportionately across production from various field interests of the oil producer.”
In terms of the definitions, equity oil refers to situations in which a company has an equity stake in the producing field, and non-equity oil refers to oil that derives from fields where the company holds no such equity stake, perhaps because the oil has been purchased.
The amendment would require that the power to make regulation with regard to attribution of blended oil should not come into force until the Chancellor has laid a report before both Houses on the extent of tax avoidance in relation to blended oil. The reason is straightforward. The Economic Secretary previously mentioned a letter to me from the Paymaster General dated 4 May, in which the Paymaster General explained that the proposed changes
“are being introduced to remove tax-driven distortions of oil company behaviour.”
On four occasions in her letter she gave further detail. She said:
“Her Majesty’s Revenue and Customs is aware that not all companies operating in the North Sea are involved in this tax-driven behaviour”.
That indicates, of course, that some companies are. She also refers to revenues being lost because of tax-driven behaviour by some oil companies. She says:
“Clause 149 has been introduced to reduce the flexibility in the current oil allocation systems, which allow oil companies to pick and choose when deciding which contributing fields are the source of a particular oil delivery and so minimise their oil tax liabilities.”
She also says:
“Companies have been exploiting the current flexibility in the allocation rules to minimise their PRT liabilities by allocating oil to non-PRT fields when the price is high and from PRT fields when the price is lower.”
That is therefore clear. It is further described inthe regulatory impact assessment, in which the Government describe manipulation of the current rules. That costs £45 million a year, with the loss of a further £35 million through the replacement of equity oil with purchased third-party oil. The industry tells us, however, that there is a technical explanation for blending, which is not simply about tax, although tax will be a consideration in any commercial transaction. I am told that blending is due to a multiplicity of fields feeding into a gathering system, each of which has a different quality or grade, which itself can change over time. On a stand-alone basis, each grade would trade at either a discount or a premium to the price of the blend, depending on whether it was of higher or lower quality than the average. Although tax is taken into consideration, there are technical reasons for blending. 
Indeed, the background note in the explanatory notes provides another very useful description of the process. It says:
“A number of pipeline systems blend production from oil fields, some of which are subject to PRT and others, which are not. An issue arises for tax purposes when the oil is sold, concerning how to allocate the sale for tax purposes across the producer’s different field interests.”
It goes on to suggest that
“many small producers of oil may sell their oil entitlement to larger producers under what are termed ‘month of entitlement’ contracts. Buyers of such oil, which is not subject to PRT or supplementary charge when on-sold, can choose to satisfy sales contracts with this oil instead of their own production.”
Two issues arise. First, tax advantages might well accrue from blending, but they are the result of the blending process and not a deliberate act of tax avoidance. Secondly, following on from the description in the background note, what might the knock-on, perhaps unintended, consequences be for small producers should the large producers choose to source only from their own equity oil, and not to purchase from small producers elsewhere? Amendment No. 374 seeks to have the Government publish a detailed report on the extent of genuine tax avoidance in the sector, and perhaps to contrast and compare that with tax advantage that is gained not directly as a result of an avoidance measure but simply as a consequence of blending for good technical reasons.

Paul Goodman: I want briefly to congratulate the hon. Member for Dundee, East on having found a device that enables the Committee to find out from the Financial Secretary the main intention of companies that carry out the blending. Do they do it because they have to for technical reasons, or to what extent is it to do with tax avoidance? Just in case the hon. Member for Dundee, East was not clear—I think that he was entirely clear—I point out that we want to hear the Financial Secretary’s assessment of whether blending takes place so that the companies involved can avoid tax? Do the companies agree with his assessment? However, I warn the hon. Member for Dundee, East, although it has probably occurred to him, that I shall not be at all surprised if the Financial Secretary suggests that the hon. Gentleman might be eying a tax avoidance device a bit too favourably. We shall see.

John Healey: The hon. Member for Dundee, East began his comments on the amendment by making a series of much wider points. In many ways, I do not want to anticipate the debates on the supplementary charge rate. As we explained in the pre-Budget report, the tax changes, the supplementary charge rate and the package that came with it were made in response to the increase in oil prices over the medium term. They were not a response to short-term fluctuations and spikes, as he indicated. Principally, the measures were taken to ensure that the rate of tax and therefore gain to the British taxpayer and Exchequer is appropriate and fair. In other words, it will ensure a fair share of return to the UK public for the exploitation of a natural national resource. In a sense, the changes reflect the current situation and balance of factors rather than the assessment that we made and the package that we introduced in 2002. That is why we believe that the overhaul is justified, necessary and sustainable. We think that it sets an appropriate level of taxation for North sea oil and gas for the duration of this Parliament.
I shall speak to the more specific nature of the hon. Gentleman’s amendment. As he explained, it seeks to delay the implementation of clause 149, which seeks to ensure that the tax price for a disposal of blended oil is allocated appropriately based on the producer’s field entitlements. As I indicated earlier, and to which he referred, he raised the matter on Second Reading with my right hon. Friend the Paymaster General. On4 May, in a letter to him, she explained in much more detail the reason for clause 149.
I hope that my explanation will deal also with the point made by the hon. Member for Wycombe. Essentially, the issue arises because a company’s lifting of blended oil may be derived from three different sources: from fields subject to petroleum revenue tax, from fields not subject to petroleum revenue tax and from oil bought in from other producers. The hon. Member for Dundee, East indicated the degree of flexibility in the current system of allocations. In effect, there are few, if any, rules that govern the way in which those allocations are made for tax purposes. In practice, blending goes on, and clause 149 will mean that the commercial benefits and practices derived from blending will not be affected.
A problem arises with the allocation for tax purposes of oil that goes into a particular blend. The existing rules for allocating blended oil to particular fields for tax purposes are too flexible; some companies have been able to allocate oil to non-PRT fields and to buy it in when the price of oil is high, and then to allocate it to PRT fields when prices are low, irrespective of from where the oil that composed the blended oil derived. Those allocations do not reflect therefore the actual proportions that each field contributes to a particular lifting of oil.
Her Majesty’s Revenue and Customs consulted the industry widely on that issue, and we set out the issues in the discussion document that we published in July last year. Since then, the matter has been discussed fully with the industry, including with oil terminal operators. The industry confirmed those discussions, and HMRC’s further analysis confirmed the extent of that tax-driven practice. The analysis and discussions support fully the extent of the protection required and the impact of our proposed measures. As the Red Book explained, we expect those measures to protect revenue of £20 million this year, and £35 million next year and £35 million ongoing in the following years.
The hon. Member for Dundee, East focused his amendment on the date of implementation. Indeed,the industry was concerned early on—following the discussions kicked off in July 2005—that the Government might want to implement the measures on 1 January 2006. It told us that that would give companies little time to reorganise their internal compliance procedures. At the time of the pre-Budget report, we announced that the changes to the valuation of non-arms-length disposals of oil would run from1 July 2006, rather than 1 January. That also allowed us to take further into account some of the other representations about the technical detail.
To reassure the Committee, I point out that although the industry body, the United Kingdom Offshore Operators Association, has some concerns about the regulatory and administrative impact on its member companies, it notes that
“the Government has listened to specific concerns raised by the industry during the consultation process about unforeseen economic, technical or practical consequences and that it has amended its original proposal.”
We are introducing a necessary, proportionate measure in a way that has responded to the detailed discussions and points put to us by the industry. The industry expects the measure to be implemented from1 July and has expected that to happen since we confirmed it in the pre-Budget report in December. The amendment tabled by the hon. Member for Dundee, East may have been useful in opening up some of the broader discussions, but I hope that he will not press it.

Stewart Hosie: I have listened to the Financial Secretary. He spoke at the beginning about the balance of factors in 2006 being taken into consideration, rather than the situation in 2002, and explained that oil and blending could be derived from PRT oil, non-PRT oil and, indeed, third-party purchased oil. He also referred to the consultation. I have seen the comments on the UKOOA website, and so on.
It was telling that the Financial Secretary said that some companies have been able to allocate oil to their tax advantage, irrespective of the blending requirements. He also said that the proposed measures were proportionate. My difficulty is that I am none the wiser about the value of the tax benefit that comes from the purely technical process of blending and what part of the tax advantage comes through active tax avoidance.
I heard what the Financial Secretary said. However, I am obliged to push my amendment to a vote.

Question put, That the amendment be made:—

The Committee divided: Ayes 3, Noes 15.

Question accordingly negatived.

Clause 149 ordered to stand part of the Bill.

Clause 150

Oil: nomination scheme

John Healey: I beg to move amendment No. 219, in page 124, line 37 [Vol I], after ‘(9)', insert—
‘(a) omit “subsection (7) or”, and
(b) '.

Joe Benton: With this it will be convenient to discuss Government amendments Nos. 220, 221, 222.

John Healey: I rise briefly at this point because this set of amendments to clauses 150, 151 and 152 introduces the changes to the nomination scheme that, we believe, are required. It may help the Committee if I say a word about clause 150, which is the context for the amendments that we are considering.
Clause 150, together with clauses 151 and 152, provides for changes to the nomination scheme for petroleum revenue tax purposes. The nomination scheme is an anti-avoidance one introduced by the previous Government. It was designed to stop the process of what was known as “tax spinning”, which is when companies enter into a range of forward-sales contracts enabling them to decide which to deliver their equity oil through so as to minimise their PRT liabilities. In the past 18 months, HM Revenue and Customs has become aware that the time limits in the nomination scheme still provide an opportunity for companies to tax spin. Therefore the aim of the scheme is being undermined. That results in a considerable loss of tax, particularly with the rise in oil prices. The tax saving provides those companies that have the facility and, more particularly, those that use the flexibility in the rules to tax spin with an unfair commercial advantage. It is for that reason that the Government believe that it is time to tighten up the rules. The clause therefore provides for changes in the way that nomination excesses are calculated under the revised nomination scheme.
We have consulted the petroleum industry on the changes and have significantly redesigned our original proposals to tackle the issue because of industry concerns about repercussions that were not intended by the measures.
The amendments allow for nomination excesses that are brought into charge for ring-fenced corporation tax and supplementary charge purposes to be deductible against non-ring-fenced corporation tax profits. The amendments add a relieving provision to the clause. They allow such excesses to be deductible in arriving at a company’s non-ring-fenced profits. That ensures that the scheme can be effective and that companies are not taxed unfairly. It also meets a concern raised by the oil industry during discussions on the oil tax pricing measures contained in the clauses. I commend the amendments to the Committee.

Amendment agreed to.

Clause 150, as amended, ordered to stand part ofthe Bill.

Clause 151

Oil: amendment of Schedule 10 to FA 1987

Amendment made: No. 220, in page 126, line 32 [Vol I], leave out subsection (8) and insert—
‘(8) In paragraph 6—
(a) in sub-paragraph (1) omit “Subject to sub-paragraph (3) below,” and
(b) omit sub-paragraphs (2) and (3).'.—[John Healey.]

Clause 151, as amended, ordered to stand part ofthe Bill.

Clause 152

Oil: nomination excesses and corporation tax

Amendments made: No. 221, in page 127, line 25 [Vol I], after ‘field),', insert—
‘(a) '.—
No. 222, in page 127, line 28 [Vol I], at end insert—
‘, and
(b) for the purposes of corporation tax, that amount shall be available to the person as a deduction in computing the profits of any trade to which section 492(1) does not apply.'.—[John Healey.]

Clause 152, as amended, ordered to stand part ofthe Bill.

Clause 153

Increase in rate of supplementary charge

Stewart Hosie: I beg to move amendment No. 375, in page 127, line 37 [Vol I], at end insert—
‘(2A) The amendment made by subsection (1) shall cease to have effect if the average price of Brent crude oil falls below$30 a barrel for one month.
(2B) If subsection (1) ceases to have effect as a result of the provisions in subsection (2A) above, the Chancellor of the Exchequer may by order restore the amendment made by subsection (1) if the average price of Brent crude oil rises above $30 a barrel for one month.'.

Joe Benton: With this it will be convenient to discuss amendment No. 376, in page 127, line 37 [Vol I], at end insert—
‘(2C) If the average price of Brent crude oil falls below $40 a barrel for one month, the Chancellor of the Exchequer shall laya report before both Houses outlining options for introducing a variable rate of supplementary charge.'.

Stewart Hosie: I wish to draw from the recent study into North sea activity up to 2035 by Professor Alex Kemp and Linda Stephen from the university of Aberdeen, which was undertaken after the 2006 Budget and gave full consideration to the increase in North sea tax.
In summary—it is a large document—the study tells us that under the $40 a barrel scenario, with the current tax regime, field investment is likely to hold up well
“for many years averaging over £4bn per year for a considerable number of years”.
Under the $30 a barrel scenario,
“investment falls below current levels but averages more than £3bn per year for a considerable number of years”.
And under the $25 a barrel scenario,
“field investment falls at a sharp pace”.
That means that fields that would have been profitable before the tax increase will no longer be profitable and therefore will not be developed as the oil price falls.
Under the $40 scenario, 24 projects would be deterred, resulting in a reduction of field investment of some £1.13 billion and of operating costs of £1.1 billion,and lost production of 189 million barrels. Under the $30 scenario, 24 fields or projects would be deterred, the likely reduction in investment would be about £1.8 billion, the reduction in operating costs would be about£1.3 billion and the reduction in production would be about 230 million barrels.
Although the increase in the supplementary charge, combined with the high world oil price, gave the Government a significant windfall last year, and is likely to do so again this year, if the world price falls, and the tax rate remains high, there could be hugely detrimental effects on the industry and Exchequer yield.
Over the next 30 years, that current short-term gain could be outweighed by a loss of £18 billion in oil-tax revenue if the price were to fall to $40 a barrel and the tax rate remain high, and a further loss of another£18 billion if it were to fall as low as $25 a barrel. Those figures are based on calculations from Professor Alex Kemp, published last week, which suggest that over the lifetime of the sector, some 3 billion barrels of potential output could be lost from the North sea if the oil price were to fall to $30 a barrel and the tax rate remain high.

Rob Marris: The hon. Gentleman has given us a welter of figures, but will he disaggregate the effects of varying oil prices and the supplementary tax? One needs to disaggregate the two in order to make sense of those figures, unless he did so and I missed it, in which case I apologise. If not, please will he disaggregate the effects of those two factors?

Stewart Hosie: The precise purpose of the research was to aggregate the consequence of both factors. The conclusion might be different if the world price fell and tax was lower or higher, and likewise, if tax was lower or higher and the oil price stayed the same, there would be a different result. The point of the research and the amendments is that the factors are aggregated because that is the current situation. We must take both price and tax into consideration.

Rob Marris: But let us say that the world oil price falls to $25 a barrel and the supplementary charge remains at 20 per cent. If that happened, we would have his figures. However, if one were to strip out the 20 per cent. charge, and find that exploration, for example, remained almost totally unaffected by not having that supplementary charge, or having it at 10 per cent., one would know that the world oil price was the predominant factor, about which it is hard for the Government to do anything.

Stewart Hosie: I understand what the hon. Gentleman is trying to say. I shall give him sight of the report later, and he will see that it is not simply extraction that tails of, but exploration and development, and likewise with the high tax base and low world oil price—I shall come on to the low world oil price in just a moment.
Before I do that, I shall speak briefly to the amendment itself, which is designed to provide a balance between protecting extraction from marginal fields when the oil price falls, and protecting Exchequer yield when the oil price remains high. We need to consider that and put the mechanism in place now because it is clear that future investment decisions will be driven by current tax and oil price forecasts. Those decisions take a long time to put into place; people have to forecast what is likely to happen in the future.
Like the tax rate, price is a driver, and we cannot count on oil prices easing much in the near future. It is likely that the price will average $40 in the medium term. In the long run, it might be $25 or $30. Those are not my words; that is what Lord Brown from BP said yesterday in Der Spiegel. In short, the UK risks losing out on some £60 billion of oil production, and potentially £18 billion of oil revenues if the world oil price follows the pattern suggested by Lord Brown and the tax remains high. Amendment No. 375 is designed to tackle that. Should the oil price fall to less than$30 a barrel, the increase in the supplementary charge, which is equivalent to a 25 per cent. rise in corporation tax, will cease to have effect. However, it is not designed to be a one-way regulator. If the price rose again, the Chancellor could, by order, reinstate the increase.

Brooks Newmark: I am interested in the hon. Gentleman’s analysis. Has he done a sensitivity analysis on the effect of the $10 shift from $40 to $30 in terms not just of the cost to the Exchequer but of jobs, inward investment, balance of trade and security of supply? They are just as important as the revenue issues that the Government seem to be focusing on.

Stewart Hosie: When I have as many civil servants as the Treasury, I shall complete the full analysis for the hon. Gentleman. The key point is the change from$40 to $30. Because each field is different, the tipping point into or from viability is also different. Amendment No. 376 tackles that problem. Should the world oil price fall to below $40 a barrel but stay above $30, the Chancellor would be obliged to report to Parliament options to vary the supplementary charge. If the fall was to $38 or $39 a barrel, and it was estimated that that was a short-term blip and it was likely to rise again, the option might be to keep the charge as it was. If it dropped to $33 or $34 a barrel as part of a long-term downward trend, the assessment might be to reduce increases in the supplementary charge or to take some other action.
The intention of both the amendments is clear. It is to create a framework that allows a fair tax yield while encouraging investment now and development and extraction from the North sea well into the future.

Helen Goodman: Again, I congratulate the hon. Member for Dundee, East on the ingenuity with which he has framed his amendments. He is right, in commenting on this clause and others, to draw attention to the context in which this part on oil operates—namely, the main proposal to double the10 per cent. surcharge on corporation tax, which the Chancellor announced in the pre-Budget report last year. The Chancellor also announced that there would be no further rises in North sea oil tax during this Parliament. We would not mind hearing confirmation from the Financial Secretary that that is stillthe Government’s position. The Chancellor also announced that companies would be given tax incentives to help them to explore and develop “the most difficult fields” by extending the exploration expenditure supplement to all ring-fenced activity that we will consider in a later clause.
It is important to note that the reaction of the oil industry to that package of announcements was unfavourable. Malcolm Webb, chief executive of the United Kingdom Offshore Operators Association, said:
“At a single stroke, the Treasury has rewritten the Industry’s future. It will severely undermine business confidence”.
I suspect that Ministers’ reaction to those words, and other words of disapproval that were spoken at the time, was to say in private—they would not put it so undiplomatically in public—“Well, the oil companies would say that, wouldn’t they?” That response might in some quarters, but certainly not in Scotland, find a sympathetic public ear, because the oil companies are not an immediate source of public affection. They do not, for instance, command the same popularity as fluffy kittens. None the less, they are important contributors to the economic prosperity not only of Scotland but of the UK—which fluffy kittens, on the whole, are not.
The industry ranks among the top 10 global producers. It provides employment for more than 260,000 people, many of whom work in Scotland, though not all—it is a UK-wide issue. To cite a random figure, 11 per cent. of that number are in the north of England and East Anglia. In the last financial year, furthermore, the Treasury gained some £7 billion from the industry, and the proposed increase will result in a further £2 billion intake. So clearly it is necessary to consider whether Mr. Webb might be right.
Obviously, the North sea competes with other basins. Reserves are being depleted and tax increases are unlikely, to put it mildly, to make the North sea more attractive. According to the industry, the new incentives to which the Chancellor referred in the pre-Budget report, which we shall consider later, are unlikely to compensate for the doubling of the corporation tax surcharge. Indeed, according to the UK Offshore Operators Association, the corporation tax increases will reduce the post-tax value of new discoveries by about 16 per cent.
Ministers and others might say that the industry was previously wrong to issue such warnings, because tax increases did not damage profitability. That is true, but at this stage we must consider the relationship between profitability and high oil prices which we have already explored this morning. Having introduced the supplementary charge in the 2002 Budget, the Treasury is coming back for a second bite at the cherry. The industry is a convenient source of revenue while profits remain large and revenues high.
The quote of Lord Brown that the hon. Member for Dundee, East has just provided illustrates my point that there is a clear danger—I put it no higher than that—that the Treasury is gambling on oil prices remaining high. If they do not remain high and the gamble goes wrong, the industry will be hit by the double whammy of higher taxes and high exploration costs, as the Treasury Committee warned.
There is a parallel with pensions taxation. Pension funds seemed to be an easy source of income in 1997, when most boasted surpluses, and the oil companies seem to be an easy source of income now, while they are making very considerable profits. However, just as the Chancellor’s decision to take the easy option on pensions led to unexpected consequences for the pensions industry and for pensioners, there is a danger that the increase will lead to unexpected consequences for the oil industry and those who work in it.
The hon. Member for Dundee, East probably agrees with me that the arrangement proposed is not ideal. Ideally, a commodity tax should be set at a level that is robust enough to accommodate any fluctuations in the price of that commodity. He is making the best of a bad job by suggesting that the tax contains dangers and should be adjusted according to rises and falls in price. That does not provide the stability and certainty that the industry would ideally wish for.

Stewart Hosie: What does the hon. Gentleman consider to be a fair tax, to avoid the necessity of a regulator as I am proposing?

Helen Goodman: I am sorry to disappoint the hon. Gentleman with my response. If he is asking me at what level I think the tax should be set, I have to answer that the Opposition are not in government, but we expect to be in 2009 and we shall give him that information shortly before the election. I cannot do better than that this morning.
For those reasons, my hon. and right hon. Friends and I are not immediately attracted to the amendments, but we want to hear the Financial Secretary give a clearer and fuller explanation than we have heard to date of the need for the changes and their effect on the industry generally, particularly on employment. We believe that the Financial Secretary should explain, for example, what assessments—the latest updated assessments—the Treasury has made of how the new tax regime will compare with that operated by our competitors, what impact the surcharge increase will make on costs and what impact the new tax regime will have on employment in the industry and its supply chain. We should be grateful if he addressed all those points.

Julia Goldsworthy: I have a couple of short points to add. The hon. Member for Wycombe was talking about the need for a stable framework and said that the amendments tabled by the hon. Member for Dundee, East did not achieve that. There is also a point to be made about the fact that the announcements on increasing the supplementary charge are adding instability and uncertainty to the system. Ultimately, the proposals were advanced and justified on the basis of high oil prices, but we have never heard about any framework that explains what will happen in the event of oil prices falling. The hon. Member for Dundee, East has done a good job in raising this issue.

Rob Marris: I find the hon. Lady’s remarks extraordinary, coming as they do from a member of a party that has just announced its intention to increase green taxes. This is an increase of tax on oil by the Government, which is a green tax, whether she likes it or not. Can she tell us whether she supports an increase in green taxes?

Julia Goldsworthy: I have never heard the Chancellor of the Exchequer describe this as a green tax. We are talking about certainty for the market, which is what our proposals are about, although I am sure that it is not in order to talk about those in this forum.
If the Prime Minister is worried about energy security and talking about what we need to maximise on our doorstep, he needs to ensure that fields are not decommissioned too early, because every barrel of oil that stays in the North sea oil fields will neither pay tax nor employ any people. Again, that is an important issue. I shall appreciate hearing the Financial Secretary’s comments on what impact he feels the changes will have and what efforts his Department is undertaking to ensure that there is market certainty in this area, because currently there is not.

John Healey: I am interested in the fact that the spokespeople for the three Opposition parties are trying to question, criticise and contest the decisions taken in the pre-Budget report on this new package of tax rates and provisions. They could have chosen to debate the matter more fully on the Floor of the House as part of proceedings of the Committee of the whole House rather than in Committee this morning. Nevertheless, I am grateful for the chance to do so.
The hon. Member for Dundee, East essentially says that he wants two things from the tax regime. First, he wants a degree of stability and certainty. I caution the hon. Member for Falmouth and Camborne (Julia Goldsworthy), who says that she is concerned about that as well; she needs to look carefully at the amendments tabled by the hon. Gentleman, because, as I shall explain in a moment, they are likely to have precisely the opposite effect.
Secondly, the hon. Gentleman wants a fair tax regime for the North sea—the UK continental shelf. In that, he is with the Government. He did not explain it, but our objectives for the North sea tax regime are twofold: we want a fair tax system that delivers for the public the appropriate returns from the exploitation that the companies are able to make of a finite natural national resource; and we want a tax regime that will encourage and support the levels of investment that will lead to the fullest possible exploration, exploitation and recovery of those resources.

Stewart Hosie: Does the Financial Secretary recognise that we are seeking through the amendments to take cognisance of what could happen to investment and extraction, particularly in marginal fields, should the oil price fall? Does he not think, whether he agrees with the amendments or not, that considering the future and taking cognisance of it in order to deal with such things now is sensible?

John Healey: I shall deal in a moment with specific proposals in the amendments. To begin with, however, I am trying to deal with the more general and sweeping arguments that he and the hon. Member for Wycombe raised.
My hon. Friend the Member for Wolverhampton, South-West (Rob Marris) was absolutely correct when he referred to the press release and the use of the Aberdeen study conflating two different impacts onthe projections of future North sea oil tax revenues. The study conflates the effect of a fall in global oil prices from $40 a barrel to $25 a barrel with the impact of the increase in supplementary charge that we are proposing from 10 to 20 per cent.
The study from which the hon. Member for Dundee, East quoted is interesting. He did not draw on some sections. It suggests that a total investment of less than £1 billion over a period of 30 years might not go ahead because of the increase in North sea oil taxation that was announced in the pre-Budget report. It also forecast that there may be a loss of less than 1 per cent. in total production, again during a 30-year period. To put that into context, our initial calculations suggest that the tax change might reduce tax revenues by less than £1 billion, again over 30 years. That compares with an increase in tax revenues of £8.3 billion that we predict during the next four years owing to the PBR changes. The importance of the study is that it supports the conclusions of the Government’s analysis that there is little risk of a substantial change to investment because of the tax increases that were announced in the pre-Budget report in 2005.
The hon. Member for Wycombe quoted the reaction of the United Kingdom Offshore Operators Association. It may have been understandable, but let me update him on the situation and commentary at the time of the changes. On 6 April, The Scotsman reported:
“The irritation and in some quarters outright anger at Chancellor Gordon Brown’s apparent ‘smash-and-grab’ raid on the UK earnings of the North Sea oil and gas sector has now sunk beneath the surface and been largely forgotten.
No great projects that anyone is aware of, or is shouting about, have been cancelled, and life appears to have resumed its course much as before.”
The Aberdeen Press and Journal, which follows such matters particularly closely, reported at the end of May that the United Kingdom Offshore Operators Association was not expecting a collapse in the level of North sea investment this decade. That should put into context and perspective for the Committee the likely impact of the package of tax changes that we announced in the pre-Budget report, give the lie to some of the more overstated reactions that were made at the time, and undermine the overstatement of the case that some still make against them.

Helen Goodman: For the sake of clarity, I want to inquire in the wake of newspaper cuttings whether the Financial Secretary has read that UKOOA now supports the changes that have been proposed.

John Healey: I suspect that the association might find itself in some difficulty with its members if it came out in outright support of the tax increase. However, to deal with the hon. Gentleman’s point about competitive taxation, it acknowledges that
“the UK still has its advantages and that is why people still want to do business here”.
In 2005, the UK’s oil tax regime was described by external commentators as one of the most lenient in the world. A comparison of global tax regimes showed that the North sea tax system before January 2006 was one of the most favourable, with the Government’s tax take on new field developments being less than that in the United States of America, Denmark, Italy, Norway, Australia, Indonesia and more than 50 other oil-producing regions. The UK’s oil tax regime will continue to be broadly comparable with other competitor regions following the increase in supplementary charge, and it will continue to be considerably more favourable than that in Denmark, Italy and Norway.
I turn to the amendments that the hon. Member for Dundee, East was proposing in the context of a concern about stability, certainty and fairness in the regime and its ability to promote the level of investment and development that we would wish to see. Can I say to him at the outset that I am not convinced by the arguments that he puts forward? I hope that I can explain that to the Committee so that if he proposes to press his amendments to a Division, the Committee will oppose them.
It is important to emphasise, as it has been questioned, the rationale for the changes we announced in the pre-Budget report. In his concluding remark, the hon. Gentleman said that he was looking for a fair tax yield. Let me put the issue in context. As Committee Members will be aware, North sea oil companies have recorded extremely strong profits in recent years. They have recorded extremely strong profits because of a sustained increase in global oil prices. Increased oil prices in the industry feed directly into the profits from the North sea because oil prices are set in the global market and are not affected by the local costs of production in the North sea. Therefore, North sea companies make significantly higher returns on capital employed than other companies operating in the UK.
In 2004, typically those companies had a pre-tax return of approximately 30 per cent. compared to less than 13 per cent. for other non-financial companies. A recent Office of National Statistics report suggested that those returns increased to nearly 35 per cent. in 2005. Those strong profitability levels are forecast to continue because of the upward shift in the expected price of oil in the medium term.
Therefore, the increase in the rate to the supplementary charge, announced in the pre-Budget report, rebalances the North sea oil and gas fiscal regime; it rebalances the fiscal regime between oil producers and consumers. It is an appropriate response to the sustained rise in oil price levels and to the increased expectations of oil price outlook. It amends the fiscal regime that we introduced in 2002 and does so to reflect the world four years on.
The amendments would introduce a price indexation into that system for the fiscal regime for the North sea. One of the main requests made by North sea oil and gas companies is for as much stability in the fiscal regime as possible. We appreciate that. As a result, we are committed to no further increases in North sea oil taxation for the lifetime of this Parliament. That gives oil companies a degree of fiscal stability in the medium term that we understand is important to their investment decisions. However, the hon. Gentleman’s amendments would make the North sea fiscal regime subject to short-term oil price fluctuations—both up and down. That would have an adverse effect on the stability and certainty that he is keen to encourage. It would make it harder for companies to make investment choices for the North sea.
As the hon. Gentleman understands, the North sea oil tax system, like all our fiscal regimes in the UK, is kept under review carefully Budget by Budget. We will continue to aim to deliver the twin policy objectives of first ensuring that the Exchequer and the public receive a fair share of the revenues from the UK’s oil and gas reserves and secondly of promoting the investment that the North sea needs for the future.
Finally, and this may be of interest to members of the Committee, we place great importance on the state of the North sea oil and fiscal regimes and the changing nature of the companies’ investments that are made in the UK continental shelf. We have recently opened discussions with the industry to hear their concerns about the structure of the North sea tax system and how well it is suited to the next stage of life of the basin. Those discussions will continue for a large part of the rest of this year. If companies wish to raise the issue of how the tax regime will respond to changes in world oil prices, we will, of course, discuss that with them and will consider any information, advice or evidence that they might want to put to us. However, let me say emphatically and finally that I am absolutely unconvinced that such considerations should be linked to short-term movements in the level of oil prices, which would be the effect of the amendments. I hope that, on that basis and having had a wide- ranging debate, the hon. Gentleman will consider withdrawing his amendments. If not, I shall have to ask my hon. Friends to oppose them.

Stewart Hosie: Towards the very end of the Financial Secretary’s remarks, he spoke of ongoing consultations on fluctuations in world prices. The Committee will understand that the fundamental aim of the amendments was to probe whether that was to be the case or whether there was to be a punitive tax regime when the oil price was low, which would damage future development and ongoing extraction. Given his comments, and the arithmetic of the Committee, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Question proposed, That the clause stand part ofthe Bill.

Rob Marris: I will be brief. I welcome you to the Chair, Mr. Benton. The clause will increase taxes on the oil industry through the supplementary charge. Will the hon. Member for Falmouth and Camborne tell us whether she and her party support an increase in tax on the oil industry?

Question put and agreed to.

Clause 153 ordered to stand part of the Bill.

Clause 154 ordered to stand part of the Bill.

Clause 155

Ring fence expenditure supplement

Question proposed,That the clause stand part ofthe Bill.

Helen Goodman: This clause is more welcome to the industry and to us than clause 153. Given that the ring-fence expenditure supplement is intended to help companies exploring for oil or gas in the development phase, can the Financial Secretary give us his latest assessment as to how much additional development will result from the introduction of this RFES—considered, of course, in the context of the overall package that he has put forward today?

Stewart Hosie: The explanatory notes to the clause state:
“Companies involved in exploration, appraisal and development activities in the North Sea will typically incur losses in early years”,
which is self evident. They add:
“The EES enables those companies to claim a 6 per cent. supplement per annum, on the pool of qualifying exploration and appraisal expenditure that is carried forward from one accounting period to another, until the allowances can be used against income...This Schedule now extends that principle to all unrelieved expenditure.”
That is, of course, welcome, but it would have been better had the Government been able to go further: to level the playing field for new entrants by increasing the extent to which unrelieved allowances are reimbursed, so that new entrants have a stronger incentive to enter into exploration in the North sea. Although it is UK policy to encourage the entry of new players, those in a non-tax paying position are penalised by comparison with existing players, because they cannot obtain immediate tax relief on all exploration and development costs.
Currently, new entrants can carry forward unrelieved allowances at 6 per cent. That could be increased to reflect either the cost of capital for new players—at little cost to the Government—or the marginal rate of tax, which was the bolder incentive offered in Norway. When the Government brought forward the proposals, did they consider increasing the allowances to cover the full cost of capital for new entrants? Have they examined the Norwegian model, which offers relief to the marginal tax rate of 78 per cent?

John Healey: This is a useful part of the package that clause 155 and schedule 9 introduce and I am glad that it has been welcomed in principle by the Scottish nationalists and the main Opposition spokesman.
The reason for the provision is to try to encourage a vigorous and active North sea industry, along with levels of investment that will allow exploration and exploitation to the fullest extent. That is the reason for the ring-fence expenditure supplement. It is a measure that is targeted particularly at companies that are new entrants to the North sea, and, given the mature nature of the basin, I think that all hon. Members will recognise that that is a small but key sector for the future North sea industry.
On the point made by the hon. Member for Dundee, East, we considered other options, as he would have expected. However, our conclusion was that the right move was to deal with the provisions and with the way that the ring-fence expenditure supplement operates. The changes increase the value of unused expenditure that is carried forward from one period to another by a compound rate of 6 per cent. per annum, and they apply to all unrelieved expenditure from 1 January 2006. It will be possible to claim for a maximum of six accounting periods, and those periods will not need to be consecutive.
The answer to the question that was asked by the hon. Member for Wycombe is more complex and has to be seen as part of a combination of factors affecting investment. The RFES targets a small but increasingly important subsection of the North sea oil industry. Its score in the Red Book was relatively modest, but we expect its impact to be significantly greater than the direct cost to the Exchequer, because it will apply to losses over a number of years, so that its full tax benefits, along with the activity that it may encourage, will not be reflected simply in current Budget costings. I hope that hon. Members on both sides will support the clause and the schedule.

Question put and agreed to.

Clause 155 ordered to stand part of the Bill.

Schedule 19 agreed to.

Clause 156

Rates and rate bands for 2008-09 and 2009-10

Question proposed,That the clause stand part ofthe Bill.

Dawn Primarolo: Good morning, Mr. Benton. The clause increases inheritance tax thresholds to £312,000 for transfers of value on or after 6 April 2008, and to £325,000 for transfers of value on or after 6 April 2009. That follows the precedent set last year by the Government in establishing the level of inheritance tax threshold beyond the immediate tax year, when they set a level of £285,000 for 2006-07 and £300,000 for 2007-08. By pre-announcing future increases at more than the forecast level of statutory indexation we shall continue to provide a fair and targeted system and certainty for families.
The increased threshold for 2006-07 means that the number of tax-paying estates in the current year will be about 37,000. Despite all the recent scare stories in the media, it remains the case that only some 6 per cent. of the estates of those who die in 2006-07 will be subject to IHT. The yield from tax-paying estates this year will be about £3.6 billion. The full cost of the increased threshold is some £30 million against index-based, and I commend the clause to the Committee.

Theresa Villiers: House prices have risen by 154 per cent. sinceMay 1997, and the extent of inheritance tax has grown since the Labour party was elected. Inheritance tax thresholds have risen by only 32 per cent. over the same period and, as we have heard, the Government’s income from inheritance tax has increased considerably—from £1.6 billion to the £3.6 billion to which the Paymaster General just referred. According to HBOS, the number of estates that will pay inheritance tax has more than doubled since 1996-97. Halifax estimates that the number of properties in the UK valued at more than the current threshold of £285,000 now stands at about 1.5 million, or 8 per cent. of all owner-occupied properties.
In 1997, only one town in the country, Gerrards Cross, had average house prices in excess of the threshold. At the last election, that figure had risen to 87 towns. Halifax has projected that that will nearly triple to 4.2 million properties by 2010 if the threshold is increased only in line with retail price inflation. It also anticipates that the revenue raised by the tax could rise to £5.5 billion by 2020.
The increases in the threshold, which the Paymaster General outlined, will go some way to mitigating those projected effects, but the fact remains that IHT is not just a tax on the wealthy. It affects an increasingly wide range of people on middle incomes and with modest assets. The effect is felt most keenly in London and the south-east but, with rising real estate prices acrossthe country, the IHT net is spreading. That is one of the many reasons for our opposition to the proposed new IHT charges on trusts contained in schedule 20, which, far from affecting a privileged few, will impact on a range of ordinary families.

Edward Balls: Will the hon. Lady give the Committee her definition of middle income for these purposes?

Theresa Villiers: I do not have a precise figure for that. However, the hon. Gentleman will be aware that the average house price in London has certainly put a lot of people within the IHT net.

Edward Balls: The hon. Lady uses the term middle. How would she define middle for these purposes?

Theresa Villiers: I think that I have answered that sufficiently. I am grateful to the Economic Secretary for his intervention.

Julia Goldsworthy: Given the concerns that the hon. Lady is raising about the IHT threshold, does her party plan to propose an alternative threshold that she considers would be fairer?

Theresa Villiers: No, we are not making commitments on tax thresholds at the moment because, as the shadow Chancellor made plain in a speech in Manchester just a couple of weeks ago, we are not yet in a position to know whether the country will be able to afford up-front tax cuts at the point when, as we hope, we become the Government in 2009. Therefore, we are making no promises about reducing taxes. In the long term, we will seek to share the proceeds of growth between reducing taxes and generous funding for public services. However, in the shorter term we are not in a position to make up-front promises about tax cuts.

Dawn Primarolo: The hon. Lady’s position is ridiculous. To suggest that one can say that an individual will be subject to inheritance tax simply by taking the price of his house is typical of the scare tactics in which the Conservative party unfortunately engages. Let us be clear; in March 2006 the average house price for the UK was £159,950. However, let us take London. In fact, a lot of the population does not live in London—that might come as a bit of a surprise to Conservative Members. In London, that figure is £235,000.
The hon. Lady missed out two crucial points. Conveniently, she continues to ignore the fact that only 6 per cent. of estates pay inheritance tax because the majority of transfers, particularly of property, take place between spouses and therefore are exempt, as she knows. We will discuss that during consideration of another clause. Being a home owner does not automatically bring a person into inheritance tax.

Rob Marris: Does my right hon. Friend agree that the hon. Member for Chipping Barnet overlooks the fact, as Conservatives often do in the debate on house prices, that most of the people in the south-east in London who might be caught be the provisions are actually being taxed on death on a windfall profit from a rise in house prices? That does not seem a bad tax at all.

Dawn Primarolo: In the debate on clause 157 and schedule 20 there will be discussions on the inheritance tax, and the point at which it is levied and why. It does not do the House justice if some Members frighten the living daylights out of citizens by misrepresenting the facts and encouraging citizens to believe incorrectly that they are in a particular tax net.

Julia Goldsworthy: In the Paymaster General’s opening remarks, she referred to the threshold change as a fair and targeted system, which is echoed in the Red Book. On what basis did she determine the rise in figures put forward today for that fair and targeted system? How did she determine that those figures represent a fair system? On what basis did she make that decision?

Dawn Primarolo: I did so by looking at the percentage of estates within inheritance tax, recognising the cost to the taxpayer—£30 million—and by responding to questions about how the tax system works in terms of income and wealth.

Brooks Newmark: Will the Paymaster General give way?

Dawn Primarolo: No, I shall not give way.
Therefore, if Opposition Members want to engage in the inheritance tax discussion, it would be good if they got the basic facts right in the first place.

Jeremy Wright: I welcome you to the Chair, Mr. Benton. I shall make a straightforward point on the Paymaster General’s comments. She said that it is important to get the facts right. Surely, one of those facts is this: according to Halifax, if the threshold for inheritance tax had been increased in line with the increase in house prices, that threshold would now be £425,000. The best that the Government can do in the Finance Bill is to make the threshold £325,000 by 2010. Is it not right that, because of that measure, more people will be caught by the tax?

Stephen Hesford: The Opposition Front-Bench spokesman has just said that his party is unable to state its position. The hon. Member for Rugby and Kenilworth (Jeremy Wright) made his point based on the facts, and his position is that the rate would rise to £425,000, but his Front Bench cannot make that point. What are the facts?

Jeremy Wright: I think that the hon. Gentleman misunderstands me; I am stating the facts. Those are the facts, and I note that he does not argue that those are not the facts. I am making the point that if the Government were genuinely concerned to ensure that only the same proportion of the population as previously affected by inheritance tax were still affected by it, the threshold would have to be £425,000. It is clear that they are not concerned with doing that.

Brooks Newmark: Will my hon. Friend give way to save me giving me a speech later? Does my hon. Friend accept that the point that the Paymaster General is missing is the concept of fiscal drag? That is not a form of economic cross-dressing. I can see the Economic Secretary getting excited there. Fiscal drag is pulling much of middle Britain into the inheritance tax system, and that is what we should be arguing about.

Jeremy Wright: I am grateful to my hon. Friend. I agree with him. It is fiscal drag that I am discussing. This is not accidental. The Government are deliberately taking more people into the ambit of inheritance tax than was previously the case. That is the point and it will be objected to by many of my constituents and those of other Committee members.
It is clear that people are being penalised, as the hon. Member for Wolverhampton, South-West quite properly says, on a windfall on the property that they have gained. The Government do not choose to tax that windfall only by inheritance tax, they also do so by stamp duty, which has also increased dramatically. The Government should be honest about what they are trying to do, which is to tax property more heavily than they have previously.

Colin Breed: I echo a lot of what has been said. Property prices have had a dramatic effect on the issue of inheritance tax. While the Liberal Democrats have not decided on the rates or anything else, I believe that death is an appropriate time to take some tax. Without doubt, property prices have resulted in a windfall for many people to which they have not contributed, so this is an appropriate tax.

Brooks Newmark: Does the hon. Gentleman agree that an individual who buys a house is making an investment and therefore should be rewarded for taking that risk. It is not just a windfall.

Colin Breed: Most people buy a house to have a home. Those who have bought in more recent times have paid expensively for what they have acquired. Whether they will see the investment returns in the next 10 years or so that may have been made in other years is a debatable point.
The principle is that an inheritance tax should be at an appropriate level. That is where we come to the point about fairness. Most people are beginning to think that the tax is hitting those who are in the £300,000 to £500,000 bracket, whereas those who have significant wealth have found means of avoiding substantial amounts of inheritance tax.
We know that only 6 per cent. of estates pay inheritance tax—I do not know whether it should be6 per cent. or 5 or 10 per cent.—but what we should be considering is the fairness of this. While 370,000 estates fall into this category, I would be interested to learn, if the figure is available, the average estate value. I suspect that it is significantly lower than many of us want to see. That is part of the problem.
The inheritance tax system, as it is currently drawn, is not tackling the high levels of wealth that is inherited from one to the other. There have been too many means by which such people can avoid this tax. The incomes of those who are now being caught progressively more on fiscal drag, and so on, is being generated from estates of much lower average values. That is where some of the perceived unfairness derives from.
While the level remains at 40 per cent., that is a significant proportion of an estate worth between £300,000 to £500,000. It is in that area that there needs to be some new thinking. I hope that in the months and years to come in this Parliament, we might get an inheritance tax system—

Mark Francois: The hon. Gentleman has talked about the potential unfairness of the tax biting on estates worth £300,000 to £500,000. Given his party’s recent announcements, how does he see its plans to smack people over the head in terms of capital gains tax affecting people with that amount of money?

Colin Breed: As I say, we are not making announcements here. These matters are still the subject of considerable debate in which I am participating. At present, there is an inherent unfairness in the sense that more lower value estates—although obviously above the threshold—are being hit at 40 per cent. and higher value estates are able to avoid that 40 per cent. charge on far too many occasions. How we tackle that problem is a matter that needs to be addressed.
I should be interested to know the average size of those 37,000 estates. I suspect that it is low in respect of the thresholds. That means that they form a significant proportion of the £3.6 billion of tax that is raised rather than that tax being generated at much higher levels.

Rob Marris: I do not have to declare an interest because I do not own property that is worth more than £285,000, let alone £312,000. I must be in the lower income bracket rather than middle. I have lived in the same house in Wolverhampton for the past 22 years.
I applaud the Government. The hon. Member for Rugby and Kenilworth (Jeremy Wright) has a point. More people will be paying inheritance tax—although not the vastly inflated figures that have been bandied around by some—because of increasing prosperity. House prices are increasing because of lower interest rates, economic stability and increased prosperity and employment. That is a jolly good thing and it will lead to more people paying inheritance tax. I support that.
As I said earlier, inheritance tax is one of the least insidious of the taxes, especially given house prices. Most people out of that 37,000 will be paying because of a windfall gain on a property that they bought many years ago. If they had bought it recently it would still have a mortgage on it and, if they die unexpectedly young, that will be netted off the value of the property and their estate will not be above the threshold. I cannot think of a less insidious tax than on a windfall gain that no one has done anything in particular to deserve—it is just the way in which the house prices have gone—and which is paid on death. The Government need taxation revenues and, if we can have an uninsidious tax, that is a jolly good thing.

George Young: The logic of what the hon. Gentleman said is that people should pay capital gains tax when they move from one house to another.

Rob Marris: It has been a long-standing tradition that all the three main parties have encouraged home ownership throughout the country and no capital gains tax has been paid. Buying properties and doing them up with a view to a profit is susceptible to capital gains tax under the capital gains tax Act 1970, I think, but as far as I know that provision has never been enforced. Most hon. Members would have come across people who buy a succession of houses and do them up with a view to profit, not just to live in them, as the hon. Member for South-East Cornwall (Mr. Breed) said earlier. Under the tax regime that has been in place for more than 30 years, those people are liable to capital gains tax.

David Gauke: I caution the Government on their attitude that a lot of people do not live in London and the south-east as a result of which inheritance tax does not matter in many parts of the country, so it is a non-issue. The fact is that inheritance tax is widespread in a large part of the country. In my constituency, average house prices in Berkhamsted, Tring and Rickmansworth are above the threshold. The hon. Member for Wolverhampton, South-West, in his characteristic candid way, set out a respectable argument that it is a windfall tax and so on. I do not necessarily agree, but such an argument can be made. However, to deny that there is an issue given that relatively modest houses are over the inheritance tax threshold in many parts of the country is to deny the true position.

Edward Balls: I should be interested to know whether most properties in the hon. Gentleman’s constituency have a current market value that is above or below the inheritance tax threshold.

David Gauke: I accept that my constituency is not necessarily typical of the whole country, but the Halifax report had three of its towns in the top 10 on house prices. However, many constituencies have such properties.

Edward Balls: Just to redefine the question, would the hon. Gentleman say that the majority of houses in his constituency were currently valued above or below the inheritance tax threshold?

David Gauke: I would have to check the figures. I suspect that a majority are now or will be in that position in the next four or five years. I do not know whether the Economic Secretary has the figures. I have no doubt that they will be produced. I understand that the majority could well be in that situation—but a substantial number are.
It is all very well to dismiss that and say that it is not really an issue and does not matter. I am sure that it is not an issue in Normanton—I have no doubt about that—but the Economic Secretary will not always represent that seat. Were he ever to represent a seat in south-east England, he might find that his constituents raised that matter on many occasions.

Theresa Villiers: I should like briefly to respond to one point made by the Paymaster General. She may feel that the number of estates affected by inheritance tax is not significant, but the tax is causing real anxiety in middle England and is impacting increasingly widely, as the statistics I mentioned show.

Dawn Primarolo: I agree that it is causing real anxiety, because some people are perpetuating the myth that every person who has a house over the threshold now—even though the event of their death might not occur for 30, 40 or 50 years—is liable for inheritance tax. That is not true.

Theresa Villiers: People are quite able to assess their own assets and whether they are likely to pay IHT. A significant number of my constituents are deeply worried about that.

Question put and agreed to.

Clause 156 ordered to stand part of the Bill.

Clause 157

Rules for trusts etc

Question proposed, That the clause stand part ofthe Bill.

Dawn Primarolo: We now turn to the point made by the hon. Member for South-East Cornwall aboutwho pays inheritance tax. Clause 157 introducesschedule 20, and together the clause and schedule make important changes to how certain types of trusts are treated for tax purposes. In particular, they bring the tax regime for accumulation and maintenance and interest-in-possession trusts into line with the mainstream tax regime that is already in place for discretionary trusts.
Since the Government announced these changes, there has been an enormous amount of discussion, and some considerable misunderstanding, about what the new rules do. The speculation about the magnitude of the changes and the number of people affected by the proposed measures has been blown out of all proportion. I freely admit that I have been taken by surprise by the force with which the exaggerated figures have been advanced, given the comments that I have made at every stage, on Second Reading and in Committee of the whole House.
Bearing in mind the apparent confusion, I thought that it would help, at the beginning of a detailed series of debates, if I set out briefly precisely what the measures are designed to achieve—and why. A moment ago, we touched on the fact that inheritance tax is a tax on the transfer of wealth that is generally levied when someone dies and bequeaths substantial assets to others, over the threshold of £285,000. If there are assets of £286,000, the tax is not levied on the £286,000. That is, perhaps, another common misunderstanding.
The majority of people who have assets leave them to others outright when they die, but some choose to set up trusts as a way of passing on their wealth. Because trusts do not die, there is no natural occasion on which inheritance tax might be paid, so it disappears into a labyrinth. It is to that labyrinth that schedule 20 addresses itself.

Theresa Villiers: The Paymaster General says that there is no death on which IHT can bite, but there clearly is in an interest in possession trust. Why is the Paymaster General seeking to align the rules on interest in possession trusts with those on discretionary trusts when the problem that triggered the regime on discretionary trusts—the lack of a death to which to attach the IHT charge—does not exist in relation to IIP trusts?

Dawn Primarolo: I am coming to that. As we move through the debate, it is important to keep in view the facts, as opposed to speculation and the smokescreens that have been put up to suggest that we are considering something that we are not. On discretionary trusts, the tax regime already recognises the reality that a trust does not die or come to an end, so there is no natural occasion on which inheritance tax will be paid. To make up for the missing potential inheritance tax, special IHT charges apply when money is put into a trust, periodically while the assets remain in the trust and again when they leave.
Let me make it clear that I am talking about assets in excess of the current threshold of £285,000.

Julia Goldsworthy: Will the right hon. Lady give way?

Dawn Primarolo: Let me finish the point.
The two types of trust that have, until now, been exempt from the charges are accumulation and maintenance trusts and interest in possession trusts. There is no clear rationale for privileging those trusts in that way, and it has become clear that some wealthy individuals have taken advantage of that special treatment as a convenient way of sheltering their wealth from inheritance tax. That is clearly unfair, as the hon. Member for South-East Cornwall suggested, and contributes to the widely held notion, which has already been expressed in this Committee, that IHT is optional, at least for the very rich.

Julia Goldsworthy: If somebody wishes to put his estate into a trust, does he not have to tailor that trust so that it complies with existing inheritance tax and trust legislation even if his assets are below the IHT threshold? Will not such a person, whether he is a long way or only just below the threshold, have to comply with the new legislation?

Dawn Primarolo: No, the hon. Lady misunderstands. There is a nil band that covers everything up to and including the threshold. Inheritance tax becomes operational once all the assets are in excess of the threshold and are not protected by any exemption.
We are in danger of entering into debate on the schedule, and I am trying first to lay out the Government’s intentions, and to explain why there is no apparent rationale in relation to the two types of trust that I mentioned. The measure that was announced goes to the heart of the difference between money put into trusts and outright gifts. Under the old rules, accumulation and maintenance trusts and IIP trusts received the same tax treatment and the transfer was potentially exempt from IHT. If the person making it survived for seven years, no IHT liability arose.
It is somewhat simplistic to think that the two activities are identical just because they received the same inheritance tax treatment in the past. The recipient of a gift can do whatever they want with it. There is certainly no need to ask permission from the person who gave it to them. Things are quite different for the beneficiary of a trust. The beneficiary will only get what the trustees decide to give them. That might be the income generated by the trust assets or the right to live in a house owned by the trust, but the beneficiary will often have no say whatever about what happens to the capital in the trust. If trustees decide to give trust assets to someone else, there might be nothing at all the beneficiary can do about it. In short, someone making a gift relinquishes control of whatever they are giving. Someone setting up a trust does the opposite.
By leaving instructions for the trustees, the control of those who set up trusts can linger long after they have died. As I have said, it is control that makes the crucial difference. There is no reason why money in trusts should continue to be treated as akin to an outright gift when it is clearly not. Since there is already a tax regime designed to properly capture IHT on trust assets, it seems entirely logical for A and M trusts and IIP trusts to come under these rules.
As I mentioned, there has been a great deal of confusion, one aspect of which was the idea that millions of people will be affected by the new rules. I repeat that that is simply not the case. We have no specific provision for existing trusts, and in future only new trusts with substantial assets in excess of the IHT threshold of £285,000 can attract a charge. Commentators have also said that the charge is retrospective. That is incorrect: there is no retrospective tax charge. Some old arrangements might have different tax consequences in the future, but there is nothing new in that. That is how the tax system works. 
I would like to touch on some areas that the Committee may consider important. The first of these is trusts for children. The Bill makes special provision for trusts set up by a parent who wants to provide, in the event of their death, for any of their children who are minors. The Government have said from the outset that such trusts should receive special tax treatment, but not where they are intended to continue to provide benefit after the child reaches adulthood: the age of 18. At that age, special tax treatment stops and the trust begins paying income and capital gains tax. It is the age at which children will be entitled to the money in their child trust fund.
It is clear that some commentators would like the special rules to run on. Some would like them to run on indefinitely, and others until the age of 25, which is the age currently embedded in the legislation. Others have suggested that the Government are somehow forcing young people to inherit money that they will simply fritter away. I, for one, have more faith in our young people. We have provided for trustees to be able to give children trust assets when they reach adulthood at the age of 18 and pay no inheritance tax, or to choose to keep the money in trust until the age of 25 while paying a small amount of tax. We shall debate that aspect later.
The other area of great concern, about which there has been considerable confusion, is that of spouse relief, particularly trusts set up on the death of a spouse or civil partner. It has been suggested that the measure was conceived as an attack on the long-standing spouse relief exemptions built into IHT rules. I said it in the Committee of the whole House and on Second Reading, and I say it again now: that is not the case. We have been absolutely clear from the outset—and I have made it absolutely clear to Parliament at every opportunity—that the measure has nothing to do with spouse relief. There is no question of spouse relief being jeopardised in straightforward cases. That has always been the Government’s position, and I have covered that before. We will discuss the matter later, when I can expand on those points.
There is also the question of life insurance policies. Again, it has been repeatedly made clear that life insurance policies written into trust before Budget day will benefit from pre-Budget rules, just as with any other pre-Budget trust. Despite some truly spectacular comment, and speculation that millions of policyholders would be affected, following discussions and improved guidance notes the industry accepts that that would not be the case. Of course, people read those reports and were unnecessarily worried, and naturally they are seeking further reassurance, even though it is not necessary. We will debate the matter later, but I make it absolutely clear, again, that the position of life insurance policies is as the Government originally stated. At one stage, it was claimed that some 4.5 million people would be affected by the measure, but that is absolutely not the case.
In response to the point made by the hon. Member for South-East Cornwall, the Government recognise that trusts have an important role to play in helping people to manage their affairs, and the exemptions are there to do that. We believe that there should be no artificial incentive for setting up trusts because they provide an opportunity for an unfair inheritance tax advantage. For that reason, over the past few years the Government have made a number of changes, and are closing loopholes in the inheritance tax regime in this Finance Bill. There has been considerable discussion at each point. The tax regime for trusts is being brought into line so that, as the hon. Gentleman said, there will be more fairness in how and when the rules bite.
The new inheritance tax rules for accumulation and maintenance trusts, as well as interest in possession trusts, are a logical step in that process, and are part of that fairness argument. They will make inheritance tax fairer, in terms of who pays it and under what circumstances. People will feel that it is fairer because they will no longer see others taking advantage of trusts to pay it. That is a huge driving force in people’s perception of the tax system, and it influences their behaviour if they feel that that is a way through.
I commend the clause to the Committee, and I look forward to our detailed debates this afternoon as we move through amendments to the schedule.

Theresa Villiers: I do not want to anticipate the lengthy debates that we will have in the next few hours, but I feel obliged to pick up on some of the points made by the Paymaster General. For example, she repeatedly suggested that the types of trust targeted by schedule 20 are, at the moment, somehow privileged. They are not privileged; they are, broadly, treated in the same way as outright gifts. That has been a principle of taxation for many years, and the Government repeated that in their consultation process on the modernisation of trusts. The Government now seek to depart from that principle by treating such trusts in a more penal, punitive way than outright gifts.
It is a fact that the discretionary trust regime was devised to meet a particular concern about a particular type of trust in which there was no death on which the inheritance tax charge could bite; that, as I pointed out in my intervention, is not the case with an interest in possession trust, where the full property is taxed at40 per cent. when the life tenant dies.

Rob Marris: The hon. Lady talks about death. Is there not a charge when a discretionary trust is eventually wound up, after 80 years or whatever it is—she will know the figure, given her background—because of the law against perpetuities?

Theresa Villiers: The discretionary trusts will be wound up eventually. They are subject to the periodic charge regime, so at that point we are talking about 6 per cent. every 10 years. Whatever the proportion since the last 10-year anniversary will be paid when the discretionary trust is wound up.
We shall explore the fact that the measures are retrospective simply because it is not always possible to vary a will or a trust. It is also not possible for a settlor to wind back the clock and take the decision on whether to set up a trust again. The Paymaster General denies that the provisions in schedule 20, as drafted, force parents to give large amounts of wealth to teenagers, but it severely penalises those parents who want to postpone the vesting of a gift until 25 has been reached.
The Paymaster General says that schedule 20 has no impact on spouse relief. I am therefore interested to hear why she has tabled significant amendments to the provisions on IIP trusts, which would have a significant impact on spouse relief. I welcome the amendments that she has tabled on that matter, but if schedule 20 had no effect on spouse relief, why is there any need for her to have tabled about 30 amendments to her own proposals?
I am also worried that while the Paymaster General referred to current life insurance policies not being covered by the schedule, she made no mention and gave no reassurance in respect of life insurance to be written in trust in the future. If all these are scare stories, why has she tabled so many amendments—many of which are welcome—to her own schedule?
I come now to a few general remarks of my own. I repeat that this is a tax and a schedule that impacts on middle-income people and middle England. It penalises responsible behaviour and thrift. [Interruption.] If Labour Members believe that inheritance tax does not impact on middle-income people, they are clearly living in a different country from me.

Helen Goodman: I do not know whether the hon. Lady is aware that the right hon. Member for West Dorset (Mr. Letwin) has made a number of interesting comments in his attempt to help the leader of her party reposition. In particular, he has said that inequality is a problem. Does she agree with that? Her remarks on inheritance tax do not suggest that she does.

Theresa Villiers: That is nothing to do with the issue that we are currently discussing, which is a tax that penalises thrift and responsible behaviour. It penalises not only the rich, but ordinary middle-income families of modest means who are just trying to get by.
Trusts have been incorporated into a vast array of different transactions and settlements. They give rise to few, if any, tax advantages and most are set up for reasons that have nothing to do with tax. The Opposition would be happy to support targeted measures to clamp down on attempts to use trusts as part of aggressive and artificial tax avoidance schemes. However, the vast majority of those creating trusts of the type affected by schedule 20 tend to have social, family and human reasons for their actions.
Trusts tend to encourage long-term planning and the responsible management of property, and have played a significant role in conserving our cultural and environmental heritage. They can be used to guard against profligacy and imprudent behaviour, assist vulnerable people struggling with addiction, ill health, disability or mental illness—[Interruption.] If the hon. Member for Wolverhampton, South-West does not believe me on that point, he should talk to Mind about its concerns about schedule 20.
Trusts can also be used to ensure that the proceeds of life insurance are paid out promptly to help a bereaved family cope with the financial consequences of premature and tragic death. Above all, they allow families to provide for their future in a considered, flexible and responsible way. They enable the different and often competing interests of family members to be balanced fairly. For example, a trust can be an invaluable aid in achieving the difficult task of mediating between the interests of step-parents and stepchildren.

Edward Balls: Does the hon. Lady estimate that the majority of her constituents have a family trust or not?

Theresa Villiers: I would say that the majority who have made a will would have a family trust in it. There is little doubt about that. Anyone who has drawn up a will, who has children and has had professional advice is likely to have a trust in that will.
The Government do not seem to have understood that trusts are included in wills to deal with contingencies and events that might never happen. There are far more trusts in wills than end up being created because people are encouraged to plan responsibly for unforeseen events, such as the death of a child before the parent. It is likely therefore that more or less anyone with children who has drawn up a will on professional advice in the last 10 years or so will have included a trust in that will.

Rob Marris: The hon. Lady has heard a different Paymaster General from the one that I have, and she has read a different Finance Bill from the one that I have. I see no Government proposal for the abolition of trusts.
We are talking in proportions so I shall ask the hon. Lady for one: each year, what proportion of people die intestate, either in her constituency or the whole of the United Kingdom?

Theresa Villiers: Far too many. We should be encouraging people to make wills. It is hugely important that as many people as possible make wills. It does not help when the Government change legislation retrospectively, forcing people to undertake unnecessary costs and causing them unnecessary anxiety.

Stephen Hesford: The hon. Lady mentioned that those who make a will will almost certainly make it on the back of financial advice. Is that advice not usually tax-avoidance advice?

Theresa Villiers: No, it is not. Tax can come into that, but the reason that trusts, as I have said, are generally included in wills is to provide for the different interests of family members. For example, trusts can be hugely useful in making the assets of a divorcing couple stretch over two households—another important area in which they are used frequently. They can help to look after elderly relatives when old age affects their mental capacity or provide for bereaved children. They can comply with sharia principles while at the same time provide properly for a spouse, or simply provide flexible answers for people who are not confident that they can foretell all family circumstances that will apply in a few years’ time.
Trusts are an important tool for thousands in this country enabling them to manage the complications of family life and well-being in modern Britain. Imposing punitive new taxes on trusts ignores the realities of modern family life. Trusts provide an invaluable aid for those juggling what are sometime conflicting interests of different family members.
Resistance to the new charges, which the Paymaster General dismissed as scare stories, was instant and wide-ranging. Strong protests have been registered by the Society of Trust and Estate Practitioners, the Institute of Chartered Accountants, the Chartered Institute of Taxation, the Law Society of England and Wales, the Law Society of Scotland, the Low Incomes Tax Reform Group, Mind, the Parkinson’s Disease Society, the Association of Chartered Certified Accountants, the Association of British Insurers, the Association of Private Client Investment Managers and Stockbrokers, and most recently, I gather, the National Autistic Society. They have been joined by hundreds of lawyers, accountants, companies and ordinary individuals affected by the proposed changes.
I do not think that all those people are taken in by scare stories; they are genuinely worried about the impact of schedule 20. The Treasury Committee also asked the Government to look again at their estimate of how many people would be affected. The national media has waded into the debate in the tabloid and broadsheet press and on broadcast personal finance programmes.
Deep concern has been expressed about the Government’s complete failure to consult on the proposals, the retrospective impact of schedule 20,the genuine threat to the spouse exemption posed by schedule 20, the penal treatment of trusts that vest at 25 years of age, the threat of IHT being applied in divorce cases, the impact on the disabled and the vulnerable, the impact on millions of life insurance policies and the huge cost of reviewing and redrafting the millions of potentially affected wills.
I was surprised by the Paymaster General’s opening remarks because she showed no change of view from her approach in the Committee of the whole House. That is somewhat surprising in the light of significant and, in the main, welcome changes from the Government.
When I set out a few of the concerns that the professional groups have represented to me, the Paymaster General, rather harshly, said:
“The hon. Lady does not know what she is talking about.”
She accused me of a
“‘Let's make it up, because it must be true if we say it,’ approach.”—[Official Report, 2 May 2006; Vol. 445, c. 867-68.]
She then proceeded to make it clear that she had not even started on the invective. Yet she responded directly—I welcome that response—to a number of the serious concerns that I expressed, particularly about conditions 3 and 4 in new section 49A of the Inheritance Tax Act 1984 on immediate post-death interests.

Dawn Primarolo: We have not reached the amendments yet and I will deal with those questions when we do.
Does the hon. Lady agree that what I said on the Floor of the House and what is in the Bill, with the amendments, is entirely consistent? [Interruption.]No, we did not change our mind. I do not want to drift into that, but if the hon. Member for Rayleigh(Mr. Francois) intervenes and asks me exactly what happened when we reach the amendments, I will tell him.
The hon. Lady keeps saying that all middle-income families will have to rewrite their wills and to do this and that, but she cannot even tell us what middle income is, so how does she know the numbers?

Theresa Villiers: As I have said, it is patently clear that millions of wills will have to be rewritten. Evidence for that has been provided by the Society of Trust and Estate Practitioners. I acknowledge that the Government’s amendments will significantly mitigate the problem. I repeat that if there was nothing wrong with schedule 20, why has the Paymaster General found it necessary to table so many amendments to it, particularly on the spouse exemption that we raised and discussed? I believe that middle England has spoken out and I welcome the Paymaster General’s 11th-hour reprieve for many of the trusts that would have been subject to the new charges had schedule 20 remained unamended. However, as we will see from the discussions that follow, despite the real and very welcome changes in some of the amendments in the long list of Treasury amendments to its own Bill, real and serious problems remain in schedule 20, which is why I shall ask my colleagues to vote against the clause to demonstrate our continuing concern about the schedule that it puts into effect.

Julia Goldsworthy: I shall keep my introductory remarks to one of the most controversial and amended parts of the Bill brief. I note that the explanatory notes to the clause state:
“So far as new trusts are concerned...it continues the current special treatment for ‘interest-in-possession’ trusts created on intestacy and straightforward interest in possession trusts created by will; and for ‘accumulation and maintenance trusts’ to trusts created on the death of a parent where beneficiaries will take the trust assets at age 18.”
They also state:
“Trusts for ‘disabled persons’ will also continue to enjoy special treatment”.
I echo the comments of the hon. Member for Chipping Barnet. If the matter is so simple and straightforward, why has it been necessary for the Government to introduce so many amendments to their own legislation? On the face of it, if the Bill had provided for that it would not be necessary to amend it.
There have been representations from the industry and amendments have been tabled by the Government and the Opposition. It is clear that a huge amount of concern and confusion has been generated by this part of the Bill. Even with the Government’s amendments, the changes in the clause and schedule represent fundamental changes to trust inheritance tax, perhaps the greatest for 25 years. Even if those concerns are misunderstood, they undeniably exist throughout the industry and may be due in part to the fact that there was no consultation prior to the proposals being put forward. That contrasts with the action taken by the Government in 2003 when they announced measures and that there would be consultation on proposals to tackle tax avoidance using trusts with measures relating to income tax and capital gains tax.
The rationale behind the changes is still not clear and it is not clear why they were introduced so suddenly if they would have such a small impact on tax revenues. What mischief are the Government trying to tackle and how much do they expect future revenue to change as a result?
I have listened carefully to the Paymaster General’s comments and there is clearly a genuine feeling that there is mischief that must be overcome, but if there is an anomaly, surely it is in relation to potentially exempt transfers, whereby people who are cash rich can make lifetime cash transfers that are not liable for inheritance tax. However, those individuals whom the Liberal Democrats refer to as middle-income households, have assets that may be tied up in property, so they do not have the option to make those cash gifts.

Dawn Primarolo: Is the hon. Lady suggesting that the Liberal Democrat policy is to abolish potentially exempt transfers?

Julia Goldsworthy: I am simply saying that if the Government are trying to address an anomaly, they should look into that area, not simply into the taxation request.
I should be interested to know why the Paymaster General thinks that so many amendments are necessary. They will all be dealt with in turn, but I cautiously welcome many of the Government amendments that help to provide greater clarity, such as those relating to spouse exemption. They have allayed the many fears that have been flying around during the past few months. However, other amendments, which relate to life insurance policies, were deemed incomprehensible by representatives who were trying to help me to get to grips with this aspect of the Bill.
There are further inconsistencies in those amendments. Although the Government have gone to great lengths to provide transitional protection in the area under discussion, in others they have absolutely neglected to do so. Any greater clarification of the clauses is welcome, but the intervening period since the original announcements has created a great deal of worry for many.
Many of the amendments will help to smooth some of the Bill’s rough edges, but the concern is that there will be plenty left. If the Government have been tabling amendments in the past few days, what other areas are going to come to light as those detailed and complex proposals are put into practice in the months to come? The concern is that year after year, there will be endless tweaking to try to get the legislation to do what it was intended to do. I am concerned that we will not deal with all those rough edges today.

Rob Marris: The hon. Member for Chipping Barnet was right about some things. There are many reasons why people have a trust, write a trust or whatever, and they are not all financial, nor are they for tax avoidance purposes. However, I note with interest that, two or three weeks ago, the Channel 4 money website said:
“Two in every three trusts deeds written are used to reduce liabilities to Inheritance Tax.”
I think that I practised law rather longer than the hon. Lady did, and what the Channel 4 money website said is consistent with my albeit limited experience.

Theresa Villiers: I choose to respond to that point in the same way that I responded to a similar point that the Paymaster General made in Committee of the Whole House. I quoted a lengthy list of organisations that highlight the fact that the majority of trusts hit by the provision are set up for family reasons, not tax reasons. I would believe people from the Institute of Chartered Accountants or the Low Incomes Tax Reform Group over the Channel 4 website.

Rob Marris: I am grateful to the hon. Lady, because she leads me nicely to my second point. I hope that the Paymaster General, or any other hon. Member, feels free to intervene on me if I am getting it wrong, but my understanding and recollection is that in this country, there are four types of trust: interest in possession, life interest, discretionary and accumulation and maintenance. As far I am aware, and please could the Paymaster General correct me if I am wrong, none of them is being abolished under the Bill or the amendments. Yet, the tenor of the comments from the hon. Member for Chipping Barnet is that somehow in a Finance Bill, the Government are abolishing or seeking to abolish one or more of those four trust categories. That is not the case.

Theresa Villiers: As a lawyer, the hon. Gentleman knows that the imposition of penal taxes on a particular type of legal arrangement has an impact on whether people feel able to use it to deal with their family problems.

Rob Marris: Of course it will have an impact. However, as I said, the tenor of the hon. Lady’s remarks, as we heard them on this side of the Committee, was that one or more of the four categories of trust would be abolished. That is not the case. Affected, yes; impact—to use her word—yes; abolished, no. It is not the case; it is not being abolished. Is any of the four being abolished?

Theresa Villiers: A and Ms will virtually go.

Rob Marris: The hon. Lady says that accumulation and maintenance trusts will virtually go. That is not abolition; her use of the adverb “virtually” characterises, if I may put words in her mouth, what she would describe as a very severe impact. What she says about middle income seems to be very ill defined, as is the term “middle England”. I have the honour to represent a constituency in England in which approximately 80,000 people live, and about two thirds of them are middle class. If all 37,000 of the people who died this tax year and paid inheritance tax lived in my constituency, they would still make up fewer than half its residents. That is just one constituency. If we are going to talk about middle income and middle England, we must bear in mind—before somebody intervenes on me, I know that there are more trusts than that—that only 37,000 estates pay inheritance tax. Again, before the hon. Lady intervenes on me, I am aware that trusts are used by far more people than those 37,000.

Theresa Villiers: The Paymaster General cited as one of the justifications for her figures for the number of estates affected by inheritance tax the fact that inheritance tax did not bite when there was a transfer between spouses. In reality, schedule 20 would have a severe impact on such transfers, and would make significant inroads into the number of estates covered by inheritance tax. Because of the Paymaster General’s about-turn, that threat has been averted, but the schedule could still have a significant impact on the number of estates hit by IHT.

Rob Marris: The hon. Lady used to lecture in law, but she did so a considerable time after I learned my law in the 1980s. At that time, we had what was called capital transfer tax. Transfer in that context meant a gift between person A and person B. The hon. Lady just used the phrase “transfer between spouses”. To my generation of lawyers, if not to hers, that means a gift—not a gift into a trust as a mechanism but a gift.
My right hon. Friend the Paymaster General, indeed, used the word “transfer”. Although she is perhaps wearing rather better than I am, she is of my generation; she was talking about a gift between spouses, not via a trust. So far as I am aware, outright gifts between spouses upon death will not be affected at all. If the hon. Lady thinks that they will, she can tell me. Outright gifts will not be affected, although they might be but when refracted through a trust. That is different. In that sense, as I understand the legal position, my right hon. Friend was absolutely right to make it clear that transfers between spouses would not be caught by inheritance tax either under the old regime or under whatever regime comes out of the proposals in this Bill.
I also say to the hon. Lady that, although I appreciate that it might be different in her part of north London—I am prepared to concede that—the majority of people who die each year in the United Kingdom die intestate. They go nowhere near a trust under a will, because they do not have a will. If they were smart, they would join a trade union and they would get a free will from that trade union.

Theresa Villiers: I am sure that the hon. Gentleman will recall from his days as a lawyer that statutory trusts arise automatically on intestacy. Section 32 of the Trustee Act 2000 applies to such trusts, and schedule 20 would therefore apply the new charges to trusts arising as a result of intestacy. Therefore, those who die intestate could still be affected by the changes. Section 32 has that impact because it imports sufficient flexibility into a trust arising under intestacy to make it breach condition 4. Condition 4 is going as a result of the Paymaster General’s amendment, and mine, so it is no longer a problem, but as drafted—

Joe Benton: Order. That is too lengthy for an intervention.

Rob Marris: It is an interesting intervention. I will not be tempted too far down that path because the hon. Lady’s knowledge is far greater than mine. My recollection of statutory trusts—I am open to correction on this—is that they apply only to quite large estates, but we shall come to that when we get on to the amendments.
In closing, I welcome what my right hon. Friend the Paymaster General has said. Many amendments are being tabled to clarify matters and to reassure people because of the large number of scare stories. As politicians, if we are honest with ourselves—even if we are not while in the debating chamber—we all know that we try to have it both ways. If we say, “I want to reassure people and clarify things so I’ll table an amendment”, people say, “Oh! You’ve done a u-turn.” If we do not do any of that, they say, “You never listen to people.” We are all prone to that as politicians. I welcome my right hon. Friend’s approach to the matter, and I look forward with interest to debating the amendments.

Philip Dunne: I shall reserve most of my remarks for the debate on the amendments, but I would like to address a point made by the Paymaster General.

Stephen Hesford: Has the hon. Gentleman no interest to declare at this point?

Philip Dunne: I am most grateful for that intervention from someone who has just got back from Germany. He may find an opportunity to declare an interest relating to football.
Has the Paymaster General any evidence of the abuse she is trying to address in relation to the use of accumulation and maintenance trusts for some sortof tax avoidance? She was most helpful in her introduction to the earlier debate on inheritance tax by identifying that 6 per cent. of estates paid it. She has provided not a jot of evidence concerning the other claim. The hon. Member for Wolverhampton, South-West referred to the Channel 4 website as his source for evidence of abuse.
The Paymaster General was invited by the Treasury Committee in its report of 20 April to provide evidence before the Committee sat to consider the clauses. The report said:
“We are concerned that a legitimate measure designed to reduce tax avoidance may penalise trusts established to protect family members and consider that the issue merits further consideration. We recommend that the Government provide”—
this is the important point—
“detailed information about how it has arrived at its estimate that the new rules on the tax treatment of certain trusts will affect only ‘a minority of a minority’ of 100,000 discretionary trusts. This information should be provided prior to consideration in Committee of the House of Commons of Clause 57 of, and Schedule 20 to, the Finance Bill.”
Other hon. Members may have received this detailed information, but before we get to the amendments, I ask the Paymaster General to provide that information to us all.

Question put, That the clause stand part ofthe Bill:—

The Committee divided: Ayes 17, Noes 13.

Question accordingly agreed to.

Clause 157 ordered to stand part of the Bill.

Schedule 20

Inheritance tax: rules for trusts etc

Theresa Villiers: I beg to move amendment No. 287, page 111, line 13 [Vol II], leave out
‘settled property (including property settled before 22nd March 2006)'
and insert
‘property settled on or after 22nd March 2006'.

Joe Benton: With this it will be convenient to discuss the following: Amendment No. 280, page 111, line 30 [Vol II], leave out from beginning to end ofline 7 on page 112 and insert—
‘(a) that the bereaved minor, if he has not done so before attaining the age of 18, will on attaining that age become absolutely entitled to the settled property or to the income arising from it,
(b) that the bereaved minor, if he has not done so before attaining the age of 25, will on attaining that age become absolutely entitled to—
(i) the settled property, and
(ii) any income that has arisen from the property held on the trusts for his benefit and been accumulated before he became beneficially entitled to the property in accordance with paragraph (a) above,
(c) that, for so long as the bereaved minor is living and under the age of 25, if any of the settled property is applied for the benefit of a beneficiary, it is applied for the benefit of the bereaved minor, and
(d) that, for so long as the bereaved minor is living and under the age of 18, either—
(i) the bereaved minor is entitled to all of the income (if there is any) arising from any of the settled property, or
(ii) no such income may be applied for the benefit of any other person.'.
Amendment No. 272, page 111, line 31 [Vol II], leave out ‘18' and insert ‘25'.
Government amendments Nos. 355 and 356.
Amendment No. 281, page 112, line 41 [Vol II], leave out
‘on attaining the age of 18 or becoming, under that age, absolutely entitled as mentioned in'
and insert
‘becoming entitled as mentioned in paragraph (a) or (b) of'.
Amendment No. 273, page 112, line 41 [Vol II], leave out ‘18' and insert ‘25'.
Amendment No. 282, page 112, line 44 [Vol II], leave out ‘that age' and insert
‘the age at which he would have become absolutely entitled as mentioned in paragraph (a) or (b) of section 71A(3) above'.
Amendment No. 288, page 113, line 12 [Vol II], leave out from ‘subsection,' to end of line 23 and insert
‘there were substituted for the reference to 13th March 1975 in subsection 8(b) a reference to 22nd March 2006.'.
Government amendment No. 357.
Amendment No. 274, page 113, line 26 [Vol II], leave out ‘18' and insert ‘25'.
Government amendments Nos. 358 and 384.
Amendment No. 290, page 113 [Vol II], leave out lines 42 to 44.
Amendment No. 291, page 114 [Vol II], leave out lines 9 to 23.
Amendment No. 275, page 114 [Vol II], leave out lines 10 to 14 and insert—
‘For section 71(1) of IHTA 1984 substitute—
“(1) Subject to subsections (1A) to (2) below, this section applies to settled property if—
(a) one or more persons (in this section referred to as “beneficiaries”) will, on or before attaining a specified age not exceeding twenty-five, become absolutely entitled to it, and
(b) until a beneficiary becomes entitled to the settled property or the income arising from it, the settled property and the income from the settled property is to be accumulated so far as not applied for the maintenance, education or benefit of a beneficiary.”.'.
Amendment No. 284, page 114 [Vol II], leave out lines 10 to 14 and insert
‘For section 71(1) of IHTA 1984 substitute—
“(1) Subject to subsections (1A) to (2) below, this section applies to settled property if—
(a) one or more persons (in this section referred to as beneficiaries) will, on or before attaining a specified age not exceeding eighteen, become absolutely entitled to it or to any income arising from it,
(b) where a beneficiary becomes entitled pursuant to paragraph (a) above to the income arising from the settled property rather than to the property itself, that beneficiary subsequently becomes absolutely entitled to the property concerned on or before attaining a specified age not exceeding twenty-five, and
(c) until a beneficiary becomes entitled to the settled property or the income arising from it pursuant to paragraph (a) above, the settled property and the income from the settled property is to be accumulated so far as not applied for the maintenance, education or benefit of a beneficiary.”.'.
Amendment No. 276, page 114, line 14 [Vol II], at end insert—
‘(1A) Section 71(4) shall be replaced with the following provision with effect from 6th April 2008—
“(4) Tax shall not be charged under this section—
(a) on a beneficiary's becoming absolutely entitled to, or to the income arising from, settled property on or before attaining the specified age,
(b) on the death of a beneficiary before attaining the specified age.”.'.
Amendment No. 285, page 114, line 14 [Vol II], at end insert—
‘(1A) Section 71(4) shall be replaced with the following provision with effect from 6th April 2008—
“(4) Tax shall not be charged under this section—
(a) on a beneficiary's becoming absolutely entitled to, or to the income arising from, settled property on or before attaining the age specified for the purposes of paragraph (a) of subsection (1) above or, if later, on the beneficiary becoming absolutely entitled to the settled property on or before the age specified for the purposes of paragraph (b) of subsection (1) above, or
(b) on the death of a beneficiary under the age at which he would have become absolutely entitled to the settled property pursuant to paragraph (a) or (b) of subsection (1) above.”.'.
Amendment No. 286, page 114, line 14 [Vol II], at end insert—
‘(1B) In section 71(6) IHTA 1984 leave out ‘and' after ‘paragraphs (a)' and insert ‘and (c)' after ‘(b)'.'.
Amendment No. 292, page 114, line 38 [Vol II], after ‘section', insert ‘71 or'.
Amendment No. 293, page 115, line 22 [Vol II], after ‘section', insert ‘71 or'.
Amendment No. 294, page 115, line 27 [Vol II], after ‘section', insert ‘71 or'.
Amendment No. 297, page 116, line 35 [Vol II], after ‘section', insert ‘71 or'.
Amendment No. 277, page 119, line 11 [Vol II], after ‘which', insert ‘section 71(1)(a) or'.
Government amendment No. 365.
Amendment No. 278, page 119, line 18 [Vol II], after ‘which', insert ‘section 71(1)(a) or'.
Government amendments Nos. 366 and 367.
Amendment No. 279, page 120, line 42 [Vol II], after ‘end', insert ‘section 71(1)(a) or'.
Government amendments Nos. 369, 371and 372.

Theresa Villiers: I shall come to the breakdown of the amendments that I have tabled in due course. In the spirit of compromise I have tabled a number of alternative formulations, which makes the Chairman’s task of reading them out rather complex.
The amendments would alter the schedule’s treatment of accumulation and maintenance trusts and those trusts that vest in children at 25. Such trusts have traditionally enabled parents and grandparents to make long-term financial provision for children. They were devised in the 1970s by a Labour Government, not to help the super-rich shelter their wealth from inheritance tax, but to help parents and grandparents provide prudently and responsibly for children. Until the child is 25, trustees, usually the settlors and a solicitor, can retain control over the income and capital. After the age of 25, the beneficiary gets the right to receive the income. In some cases, the trust will also provide that the capital passes to the beneficiary at age 25, but more often the trustees will retain some control over that capital for a period.
Schedule 20, as drafted, seeks to penalise such trusts by bringing them within the framework of rules for discretionary trusts, unless they fall within the narrow category of “trusts for bereaved minors”. Under the schedule, the beneficiaries under such settlements must be given the property, income and capital outright at 18, if not, a 20 per cent. charge will be made on property transferred into the trust, with a 6 per cent. charge every 10 years thereafter, along with an exit charge on capital advanced out of the trust.
We come now to the highly controversial aspect of schedule 20. The new regime for accumulation and maintenance trusts and bereaved minor trusts thus imposes a tax penalty on those who wish to provide financial support for their children, but wish to restrict the control and access to the money until their children reach 25. The schedule actively encourages the transfer of significant wealth to 18-year-olds. Indeed, where such trusts are already in operation, it more or less forces the trustees to do that. At least for new trusts, the settlor can take a decision about whether to make the gift at all. In the case of existing trusts, the “no transfer” option is no longer available. Either the trustees opt to vest all the property in the 18-year-old or the trust is hit by the unexpected and punitive tax bill. That seems to be contrary to common sense and certainly contrary to the principles of prudence to which the Chancellor used to subscribe.
An ICM poll commissioned by solicitors Brewin Dolphin recently revealed—

It being One o’clock, The Chairman adjourned the Committee without Question put, pursuant to the Standing Order.

Adjourned till this day at half-past Four o'clock.